Looking for some good investment ideas? Consider the restaurant industry, diversifying with different types of restaurant stocks to avoid having all your eggs in one basket. Established global restaurant chains such as McDonald's (NYSE:MCD) and Yum! Brands (NYSE:YUM) can provide stability, while fast-growing chains such as fast-casual Mexican restaurant Chipotle Mexican Grill (NYSE:CMG) and coffee and tea shop Starbucks (NASDAQ:SBUX) can serve as the high-growth portion of your selections.
The ruling duo
Investing in large, established companies comes with many benefits for the risk-adverse investor. McDonald's and Yum! Brands' market value clocks in at $95 billion and $34 billion, respectively. In terms of revenue growth, these companies generally fall into the slow-but-steady category. Last year, McDonald's grew its revenue a mere 2% while sales at Yum! Brands actually declined 6%, stemming from temporary issues such as the avian flu scare in China early last year. Moreover, these types of companies generally reside in market leadership positions, meaning they possess economy of scale, giving them the ability to purchase supplies at a lower cost and passing the savings on to consumers.
According to the Bloomberg Industry Leaderboard, McDonald's and Yum! Brands command the No. 1 and No. 2 spots, respectively, in terms of market share. Market leadership generally translates into a rich balance sheet, as a company's size and ubiquity garners it great wealth. Moreover, the lack of expansion opportunity frees up cash for the payment of dividends while you patiently wait for capital gains. As of the most recent quarter, McDonald's, Yum! Brands, and their franchisees operate 34,000 and 37,000 restaurants, respectively, on a global scale, which means they collect a great deal of cash. In the most recent quarter, McDonald's and Yum! Brands each carried $2.5 billion and $753 million in cash, respectively, on their balance sheets, translating into 17% and 33%, respectively, of stockholder's equity. Their massive cash stashes are the reason investors in McDonald's and Yum! Brands enjoy fat dividend yields of 3.4% and 2%, respectively.
While large, established companies come with a slow but steady rise in revenue and profitability, smaller companies come with more growth potential. Smaller companies also come with heightened stock-price volatility and generally hold their cash for reinvestment into the expansion of the business. However, investors with a long-term outlook stand to benefit greatly. Starbucks and Chipotle Mexican Grill come with a smaller market valuation: $58 billion and $17 billion, respectively. Last year, Starbucks grew its revenue 12% and opened 1,700 new stores, bringing the total to nearly 20,000 restaurants globally. Starbucks faces plenty of room for expansion as only 32% of its stores operate outside of the Americas in the western hemisphere. Only 10% of its stores operate in the largely untouched Europe, Middle East, and Africa region.
Starbucks does pay a small dividend of $1.04 per share per year, equating to 1.4% or less than half of McDonald's yield. Investors should expect this dividend to increase over time as Starbucks expands and further builds its cash. Chipotle Mexican Grill just barely scratches the surface on overseas expansion, operating only 14 restaurants outside of the United States. It actually has plenty of room for expansion domestically as well. Year to date, Chipotle Mexican Grill grew its revenue 17% while expanding its store count by 14% to 1,539 as of the most recent quarter.
McDonald's certainly possesses the scale and balance sheet to continue its hefty dividend. It still has room for geographic expansion in places like China and Vietnam, increasing the potential for top- and bottom-line increases and the possibility of future capital gains and dividend growth. Moreover, Yum! Brands should do OK assuming nothing else happens with its supply chain and the planned Taco Bell expansion bodes well for its shareholders and dividends over the long term. It's predicted that Chipotle Mexican Grill and Starbucks will grow their earnings per share 21% and 20%, respectively, next year. Vast overseas expansion opportunities could translate into superior shareholder gains despite their high valuations. These four restaurants merit a place on your Motley Fool Watchlist and deserve more of your research time.
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Fool contributor William Bias owns shares of McDonald's. The Motley Fool recommends and owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.